The company is considering liberalizing credit period to increase sales Present

The company is considering liberalizing credit period

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The company is considering liberalizing credit period to increase sales. Present variable costs are 70 percent of sales. Fixed costs are 16 lacs per annum. The company expects a pretax return of 20 percent on investments in receivables. Estimated projections of alternative credit policy are given below: Table no: 41 Analyse the credit policy options and recommend one with your comments. Assume 360 days in a year. Particulars Products A B C Sales Mix 50 percent 25 percent 25 percent Selling price per unit Rs. 30 Rs. 40 Rs. 30 Variable cost per unit Rs. 15 Rs. 20 Rs. 15 Total fixed costs Rs. 180000 Total sales Rs. 640000 Credit policy Avg collection Annual sales Rs. lacs Bad debts as period in no. of days Annual sales Rs. lacs Bad debts as percentge of sales current 30 days 120 actuals 1 percent proposal A 45 days 150 estimated 1 percent proposal A 60 days 170 estimated 2 percent proposal C 90 days 200 estimated 5 percent 199
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PROBLEMS FOR EXERCISE 35. Vishnu electronics manufacture and market Exotica brand of color TV sets, DVD players and Music systems. The performance data for the year 2007 is as follows: Table no: 42 Rs. Lacs Sales 12500 Cost of Sales 7500 Gross Margin 5000 Marketing Costs: Salesmen’s salaries 625 Sales men’s commission 250 Conveyance and travels 375 Advertising 750 Sales promotion 575 Warehouse rent and salaries 325 Packing and shipping 125 transportation 250 Credit collection 125 Bad debts 75 3475 Administrative expenses 865 4340 Net profit 660 200
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PROBLEMS FOR EXERCISE Additional Information: Table no: 43 Rs. in Lacs Table no: 44 The company sells all products through a common field force. All products are jointly advertised. (a) Analyze performance of each product line with your comments (b) If a product was generating a negative profit, will you recommend dropping it? Why? (c) What strategies will you recommend for each of the products? Colour TV’s Music Systems DVD players Total sales 4375 6875 3250 14500 cost of sales 2625 3875 1000 7500 gross margin 1750 3000 2250 7000 Salaries Equally allocated to all products Commission Allocated on basis of percent of sales Conveyance and travel Allocated as percent of sales Advertising and sales promotion Equally allocated to all products Warehouse rent and salaries Equally allocated to all products Packing and shipping Allocated on basis of invoice lines in the ratio 50:40:10 Transportation Allocated to all products on the basis of sales Credit collections Allocated on the basis of sales Bad debts Allocated in the ratio 50:30:20 General and administrative expenses Allocated on the basis of product sales 201
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PROBLEMS FOR EXERCISE 36. Wonder products manufacture 10000 units of their product and sell in the Indian market at Rs. 5 per unit, cost of production is Rs. 4 per unit. Production capacity of Wonder is 30000 units Cost data for producing 10000 units is as follows: Rs. Direct materials 15000 Direct Labor 11000 Variable overheads 6000 Fixed overheads 8000 The company estimates that, due to increased competition the product would have to be sold at Rs. 4.50 per unit next year.
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